Nonlinear Dynamics in Menu Cost Economies? Evidence from U.S. Data
September 23, 2024
Summary
The authors of this working paper show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the US time-series.
View PaperWorking Paper 2024-11
Abstract: We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary nonneutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary nonneutrality predict a nearly constant fraction of price changes.
JEL classification: E31, E32, E52
Key words: menu costs, inflation, fraction of price changes
Digital Object Identifier (DOI): https://doi.org/10.29338/wp2024-11
The authors thank Hugh Montag and Daniel Villar for sharing the data on the fraction of price changes. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Andrés Blanco, Federal Reserve Bank of Atlanta; Corina Boar, New York University and NBER; Callum Jones, Federal Reserve Board; Virgiliu Midrigan, New York University and NBER.
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